I am back in love with Premium Bonds after the odds of winning shortened and the prize fund was boosted in October.
If you want instant access to your cash, have £50,000 to invest, and especially if you pay higher rates of tax they are good value, returning on average around 2pc a year tax-free. But it is a close-run thing as market rates from banks and building societies are rising rapidly.
Premium Bonds work like this. Each month a prize fund is created by applying the interest rate – now 2.2pc (it was 1.4pc before) – to the total bond holdings.
There were more than £119 billion of them in October. Every bond number is placed into a random draw for a share of that money –nearly £219 million in October’s draw.
From this month, each bond has a one in 24,000 chance of winning a prize (up from one in 24,500). Most of those prizes – 70pc – are for £25 and a fraction over 29pc are for £50 or £100. Just 0.4pc are bigger prizes.
If you have the maximum of 50,000 bonds, then each year you can now expect 17 or 18 prizes of £25 and 3 or 4 each of £50 or £100. The statistical expectation of winnings from these prizes in a year is £990 – a return of 1.98pc tax free.
You can get that or a smidge more in some cash Isas, but they all come with restrictions on withdrawals. Of course, the way statistics works means some years will be bleaker than others. But with 50,000 bonds it should balance out quite quickly.
Of course, if you have only 25,000 bonds, you need to halve those returns and with 100 bonds – currently the minimum purchase – you can expect to win a prize only once every 20 years.
And as for the five your grandmother set aside for you at birth – forget it, unless you find out a way to live to 400. And forget about the million-pound prizes too.
There are two of them each month. But as the number of bonds grows the chances of winning one get smaller – currently one in almost 60,000,000,000.
On average, even with 50,000 bonds, you would wait 99,450 years before having an even chance of winning one. In the two hundred millennia since hom*o sapiens first appeared, you might have expected two. And if you bought 50,000 as the last Ice Age ended, you might expect to have won one of the eighteen £100,000 prizes.
And with those 50,000 bonds you bought to celebrate the invention of the wheel (or perhaps the plough), you might expect to have won just one £50,000 prize since. So you can assume you will not win big – even when you get down to the more modest prices. For £1,000, you’ll need to wait around 45 years or for £500 every 15 years.
Between them these prizes use 0.2pc of the 2.2pc interest rate and leave the realistic return of 2pc for us mortals of ordinary luck. But as the interest paid on savings accounts rises steadily, that is not enough for some. I know of one man who bought £50,000 bonds a few years ago and almost immediately won £5,000. He should have had to wait more than 500 years – so King Edward IV’s £50,000 bought in 1436 would just now have an even chance of that prize.
After that, his luck continued but last month he cashed them in and put his £50,000 into a two-year savings bond at 4.6pc – a guaranteed return of £2,300 a year, taxable, for two years.
Nevertheless, Premium Bonds remain popular. The latest figures show that in April over a million people had the maximum £50,000 and another 1.5 million had £20,000 or more.
Many are attracted by the tax-free nature of the prizes. But beware. On taxable savings returns, there is a £1,000 savings allowance each year which means the first £1,000 of savings interest is tax free. However, higher-rate, 40pc, taxpayers only get £500 and those with incomes over £150,000 get no allowance at all.
If you have used it up with interest from other savings – and that takes smaller sums now than it has since the allowance began in April 2016 – then the tax-free nature of Premium Bond prizes is useful.
Once you take into account the tax due on other types of savings, the 2pc typical actual return from the bonds is equivalent to nearly 2.5pc taxable interest for a basic-rate, 20pc, taxpayer which is more than you will get in an instant access account.
For a higher rate taxpayer, it is equivalent to a taxable 3.3pc and for a top-rate payer it is as good as 3.6pc. The taxable rate paid on the current crop of one-year bonds outstrip that if you can tie your money up for a year. So you can see why some are dashing for the exit.
Despite this, the number of bonds continues to rise – nearly half a billion more now than in September. Britain’s love affairwith Premium Bonds is far from over.
Paul Lewis is the presenter of BBC Radio 4’s Money Box
